Expect Little, If Any, Forced Selling Of Puerto Rico Bonds – Citi

By Michael Aneiro

The muni market continues to ponder the implications of Puerto Rico getting its credit rating cut to junk last week, first by Standard & Poor’s on Tuesday and then by Moody’s on Friday. Citi‘s muni troika of Mikhail Foux, Vikram Rai and George Friedlander today says not to expect a sudden rush by funds to sell Puerto Rico bonds, even if they’re no longer eligible for high-grade muni indexes:

Due to Friday’s downgrade, some Puerto Rico debt will be removed from major municipal indices, which increases the possibility of forced selling. Nevertheless, in our view, forced selling, if any, will be only marginal. However, for certain mutual funds, the ability to buy PR debt will diminish after the downgrade given restrictions on total high yield allocations.

Citi says crossover investors – meaning opportunistic investors who are drawn to parts of the muni market when yields there become more attractive relative to other investments – could actually see a buying opportunity for Puerto Rico debt now:

On the plus side, crossover investors continue to play a very active role (the vast majority of them are not sensitive to ratings) and might utilize the downgrade to add to their positions. We reiterate that the Moody’s downgrade also seems to be priced in since PR’s bonds have been already trading in distressed territory since August 2013 and price change has been very limited last week.

Citi says it expects Puerto Rico to focus on creating an additional liquidity cushion, “potentially by tapping the market via a large deal, which is likely to attract strong interest from crossover investors.”

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.